This copy is for your personal non-commercial use only. To order presentation-ready copies of Toronto Star content for distribution to colleagues, clients or customers, or inquire about permissions/licensing, please go to: www.TorontoStarReprints.com

At first blush, Janet Yellen, who on Saturday becomes the first woman to head the U.S. Federal Reserve Board in the century-old history of the world’s most powerful central bank, inherits stewardship of a global economy in pretty good shape. Or at least in better shape than in recent years of punishing economic hardship and justified fears of a worldwide financial-system meltdown that her predecessor, Ben Bernanke, and central bankers from Ottawa to Beijing had to deal with in the darkest hours of the Great Recession.

In both Canada and the U.S., inflation is blessedly a non-factor in the economy. The current U.S. annualized rate of 0.9 per cent is well below the 2.0 per cent at which the Fed feels obliged to raise interest rates at the risk of economic slowdown. U.S. unemployment has eased to a current 6.7 per cent, far below the Great Recession peak of just under 11 per cent.

The U.S. dollar remains strong. Mid-2000s doubts about its continued merit as the world’s reserve currency were laid to rest when, remarkably, in the midst of a made-in-America global recession triggered by an unprecedented U.S. housing bubble, world investors in their “flight to safety” bought, of all things, U.S. Treasury bills. Such is the perceived resiliency of the U.S. economy.

The bellwether U.S. housing and auto sectors are on the mend, a surprise to the many experts who warned that U.S. housing prices market would not recover for at least a generation.

Corporate balance sheets are strong, conspicuously so given that most recessions are characterized by an over-leveraged private sector. Corporate profits are at record levels, as is the stock market. An equities market currently just 3.6 per cent below its all-time high is a profoundly Main Street issue. It means the retirement nest eggs of everyday Americans who endured the stomach-churning 40 per cent collapse in equity values in 2008-09 have been made whole and then some.

Article Continued Below

Then again, the Fed-chair tenures of both Alan Greenspan and Ben Bernanke also began with no catastrophic problems on the horizon, in 1987 and 2006, respectively. Yet Yellen’s two predecessors each failed on the issue that arguably matters most, which is to identify and end wildly excessive speculation that puts the global economy at risk. They did not curb the easy money Fed practices that financed the ultimately ruinous speculation that cost eight million Americans their jobs in the Great Recession and destroyed more than 400,000 jobs in Canada.

Yellen might not quite be “the most important person on Earth,” as Time said of her appointment. But she and Christine Lagarde, the former French finance minister who heads the International Monetary Fund (IMF), between them probably have more influence in advancing global prosperity than any number of the most powerful heads of government combined.

I’ve long argued that central bankers have the upper hand in shaping the global economy. The U.S. in recent years has proved the point. A tyranny of the minority – radical conservatives in the U.S. federal legislative branch – have blocked every effort at economic stimulus proposed by a progressive president.

Yet U.S. economic conditions have gradually improved, due to the Fed’s unprecedented policy to provide the economic stimulus that gridlocked politicians will not, by means of the Fed’s controversial policy of buying a staggering $75 billion (U.S.) worth of federal debt each month, a practice called “quantitative easing” (QE).

And so the challenges Yellen is taking on are formidable. GDP growth in a gradually recovering global economy is anemic. Each of the world’s major economies – in order of size, the European Community, the U.S., China and Japan – are each suffering slower economic growth rates than is characteristic of GDP recoveries.

The world economy remains fragile. In recent days, China reported slower than anticipated GDP growth at the same time that world investors expected the U.S. Fed to finally ease up on its QE stimulus. The result was a plunge in emerging market stocks, which are down 7.1 per cent this year.

Apart from its global influence, the U.S. of course has problems at home. Its huge trade imbalance, like Canada’s, is chronically worrisome. North American household incomes, adjusted for inflation, haven’t budged for three decades. About 50 million Americans live below the poverty line.

Yellen, 67, is a non-ideological economist, in contrast with the Ayn Rand acolyte Greenspan and his free-market protégé Bernanke. While she’s a political agnostic, Yellen is wary of economic theology that insists the private sector can correct its blunders, a mistaken belief that has been America’s economic religion since the Reagan years.

Currently vice-chair of the Fed, Yellen embraces, as her predecessors at home and too often abroad did not, the “dual role” of a central bank. That role is not simply to keep inflation in check, but also to promote economic growth, and the jobs and higher household incomes that come with it.

The outgoing Bernanke, 60, erred grossly in not grasping the perils ahead from the epic U.S. housing boom. Then again, Bernanke later put in place the annual “stress tests” of America’s major banks to ensure they have adequate capital reserves to cover sudden, crippling losses.

Bernanke also became a convert to Keynesian economics, by introducing and holding to his QE practices, of which economic purists despair no matter the obvious good they have done.

Yellen’s biggest challenge is to succeed where her two predecessors failed, in deflating asset bubbles in a way that doesn’t slow the growth of the wider economy. The same economists who with near unanimity welcomed Yellen’s appointment warn that six years of QE have pumped so much liquidity into the global investing markets that perilous speculation is bound to reappear sooner than later.

Canadians are familiar with this quandary. Stephen Poloz, the Bank of Canada governor, and his two predecessors have each had emerging bubbles, in commodities and over-heated housing markets, to somehow deflate without dampening growth in the larger economy.

Yellen is “going to be trying to do something that no has ever done,” Stephen Cecchetti, former economic advisor to the Basel, Switzerland-based Bank for International Settlements. And that is to promote global GDP growth in a way that “doesn’t create significant financial stability risks,” Cecchetti told Bloomberg News this week.

Which is to say, Yellen needs to keep promoting economic growth, but in a way that doesn’t spark renewed instability from the recklessness of financiers who caused the Great Recession. If it’s any comfort, among the handful of savants warning about the coming perils of that dreadful boom was Janet Yellen.

The Toronto Star and thestar.com, each property of Toronto Star Newspapers Limited, One Yonge Street, 4th Floor, Toronto, ON, M5E 1E6. You can unsubscribe at any time. Please contact us or see our privacy policy for more information.

More from the Toronto Star & Partners

LOADING

Copyright owned or licensed by Toronto Star Newspapers Limited. All rights reserved. Republication or distribution of this content is expressly prohibited without the prior written consent of Toronto Star Newspapers Limited and/or its licensors. To order copies of Toronto Star articles, please go to: www.TorontoStarReprints.com